St. Louis County foreclosures nearly double and Missouri’s unemployment reaches 9.1 percent, St. Louis advisor addresses what you can do now to prepare your finances for a potential second-wave of economic hardship
The fear of a “double-dip” recession is back. The Federal Reserve recently issued a cautious outlook, noting that the economic recovery had “slowed in recent months. “ This, paired with high unemployment, growing federal debt, the possibility of increased taxes, reduced consumer spending, the ongoing foreclosure crisis, and more, has led some analysts to question whether the recovery will hold. With St. Louis County foreclosure numbers nearly doubling since 2009 and the state of Missouri’s unemployment rate nearing the national average of 9.5 percent, the fear of a “double dip” recession is a serious concern here at home.
“Despite the slowing economy, the odds are still in favor that the recovery will continue,” said Chad Slagle, chief financial advisor and president of Slagle Financial, LLC, an independent financial and retirement advisory firm based in St. Louis. “But err on the side of caution! What we need to make sure of now is that we have learned from our experiences in the last recession, that our previous vulnerabilities have been addressed, and that our financial affairs are protected and positioned to withstand another dip.” Slagle has identified the five most prevalent financial hardships experienced as a result of the last recession, and offered insights and advice on what you can do today to reduce the potentially negative repercussions a second recession may bring.
• Make your mortgage manageable. The mortgage meltdown and falling home prices had a lot to do with the first tumble into recession. However, today, we are experiencing record low interest rates, yielding the opportunity for many to refinance their homes to receive more manageable monthly payments. If you have been struggling with paying your mortgage due to unemployment, the Obama administration approved a bill on August 11 to provide $3 billion to unemployed homeowners facing foreclosure. $2 billion will go to the 17 states that have unemployment rates higher than the national average of 9.5 percent, and the other $1 billion will go to a new program, being run by the Department of Housing and Urban Development, to provide homeowners with emergency, zero interest loans, up to $50,000 for two years.
• Invest based on your risk tolerance. Due to the first recession, many people lost money in investments that they needed to access in the near future. If you are relying on money for retirement or to put your children through college within the next few years, then it should really be invested conservatively. Take into account your age and timeline to retirement, as this plays a part in your ability to “ride out” the stock market. Countless people have had to postpone retirement or even come out of retirement to go back to work because of the 2008 recession. While ideally you don’t want to expose your finances to any unnecessary risks, risk can also provide upside potential. At the minimum, be sure that a portion of your investable assets are liquid and/or invested conservatively. You should have at least six months of living expenses readily accessible in the event of an emergency, and for your longer-term investments, a general rule of thumb, is the ‘Rule of 100.’ Simply stated take your age and subtract it from 100. The result is the percentage that you could have exposed to higher risk investments, and the remainder should be placed in more conservative accounts. While it’s not exact science, at least it’s a place to start.
• Explore “non-correlated” investment options. Never place all of your eggs in one basket. Many who experienced substantial loss during the last recession did not have proper diversification of their financial accounts. There are numerous financial instruments and investment vehicles that are considered “non-correlated”, which means they are not tied to the performance of the stock market. Take an interest in interest-bearing accounts, such as CDs, savings bonds, savings accounts, and money market accounts. However, it is important to note that although you get to “keep” your money when investing in interest-bearing accounts, today’s low interest rates work two ways. You can borrow at low interest rates, but the return on interest bearing accounts will also be low. While you can keep what you have, interest accounts will not help you to significantly build your wealth. Additionally, look at other options such as commodities, insurance products, like fixed annuities, or even non-traditional or alternative investments. Diversification is key to not allowing any significant shift in the economy to put a halt to your future financial or retirement dreams. But if you’re getting creative with your investment strategy, be sure to seek assistance from a qualified advisor.
• Plan for your retirement. With the recession came changes to how we save for retirement. Many employers discontinued contributing to 401(k) s, pensions became harder to fund, and investments linked to troubled companies disappeared. Government funded Social Security has experienced its share of difficulties because of the recession as the lack of payroll taxes due to high unemployment has temporarily caused the program to run at a deficit. It is becoming more apparent that you have to be responsible for your own retirement savings, and as such, should place your savings in a safe and secure financial instrument. As of this year, Roth IRAs are available to anyone, no matter their income. If you convert your traditional retirement plan before the end of year, you can do so at this year’s tax rates. In the future, you may be paying a higher income tax rate on the conversion amount, which could potentially be much more expensive. As far as pensions are concerned, don’t be so sure that you’re safe, especially when it comes to public pensions. Even before the recession, pensions were troubled, and now major companies (including GM and Chrysler) are unsure of what the future holds.
• Be tax conscious. Don’t add insult to injury and put your money into an account that will nearly triple in tax liabilities next year if you cannot afford the bite. Tax rates for dividends and short-term capital gains will be taxed at a tax-payer’s ordinary income tax rate next year, up from the 15 percent we’ve seen in recent years, which could make the tax due as high as 39.6 percent. Long-term capital gains will increase to 20 percent from 15 percent, and more changes are expected to the tax code towards the end of this year. You may want to consider paying taxes on tax-deferred investments now, such as converting your retirement plan to a Roth or cashing in long-term investments to lock in today’s rates. For the future, seek tax advantageous options that allow for you to pay taxes only when the investment is realized or money is withdrawn, rather than annually. Examples of tax advantageous investments include municipal bonds, fixed annuities and treasury bills.
Slagle concluded, “If you include early projections for the last quarter, we’ve seen positive economic growth over the last four quarters, which would mean that we are technically out of a recession. Some economists believe that due to the lack of a quick recovery and combined lingering problems, such as unemployment and foreclosures, we could see another recession by as early as next year. Of course, other economists argue that a recovery is still underway, and although slow, it is steady. The bottom line is—we need to take action to ensure that we are prepared for a possible “double-dip” recession and that our finances are protected from market and any economic volatility.”
For more information on how to protect your finances from a double-dip recession and to set up an interview with Chad Slagle, please contact Alex Timeus at (702) 685-7437 or firstname.lastname@example.org.